Super Reforms – Pension Cap Breach

Super Reforms – Pension Cap Breach

We do not yet have a process for notifying the ATO of the commencement of a pension but they are clearly assuming that this will occur within days of commencement as this type of example is common in their explanatory notes.

Andrew has a personal transfer balance cap of $1.6 million. He starts a second pension worth $1 million. As he has no available cap space, he has breached his cap and has an excess transfer balance of $1 million.

60 days later, the Commissioner issues a determination to Andrew identifying a crystallised reduction amount of $1,013,759 ($1 million excess plus 60 days of notional earnings).

65 days after issuing the determination, the Commissioner issues a commutation authority to Andrew’s superannuation fund.

10 days after the Commissioner issues the commutation authority, Andrew’s superannuation fund complies with the authority and makes a partial commutation of Andrew’s pension, paying Andrew a lump sum of $1,013,759. This will restore Andrew’s transfer balance account to $1.6m

Notional earnings accrue to Andrew during the 60-day period before the determination and the subsequent 75-day period before the fund partially commuted the pension but only the notional earnings that are included in the Commissioner’s determination are added to the transfer balance account

The Commissioner assesses Andrew for excess transfer balance tax as follows:

Details Amount Days Notional Earnings
Breach $1,000,000 60 $13,759
Crystallised reduction amount $1,013,759 75 $19,192
Total $32,951

Tax is levied on the notional earnings at 15 per cent if this has been the first year of a breach. Tax of $4,943 is payable by the fund.

If Andrew was to breach his cap in a subsequent year the tax rate applied would be 30%.

The notional earnings rate is based on the general interest charge which is the 90 day bank bill rate plus 7% – currently circa 9.5%.